How should directors exercise their business judgement during the pandemic?

Photo by Dan Dimmock on Unsplash

As more COVID-19 related restrictions begin to relax during the Recovery Movement Control Order (RMCO), boards and management now face tough challenges as to how to return to the new normal. During this uncertain time, directors have to make quick decisions to lead their companies through uncharted waters. In this article, I had an opportunity to speak with Jason Sim, an Analytics and Insights, Business Analyst, on directors’ duties when exercising business judgement during the COVID-19 pandemic, particularly from the perspective of the business development team.

The Business Judgement Rule

Apart from directors’ fiduciary duties (you can check out our previous article on directors’ fiduciary duties here), a director also has a duty under section 213(2) & 214 of the Companies Act 2016 (CA 2016) to act with reasonable care, skill and diligence towards the company and its stakeholders. This is when the “Business Judgement Rule” comes in, where it assesses and determines whether the director has fulfilled this particular duty.

The Business Judgement Rule demands for directors to fulfil the requirements provided in section 214 CA 2016 when making a business call. If the director fulfils the requirements, then he/she may be exempted from liability for any losses incurred due to his/her business decision in the corporate transaction. This provides directors with tremendous deference and great protection against liability. Business is a venture designed to gain profits at the risk of suffering losses and failures at the same time, boards of directors may therefore be protected for making business judgments in good faith at their full abilities which resulted in financial losses.

So what does section 214 of the CA 2016 provide? section 214 says that directors must ensure that he/she:

1. makes the business judgement for a proper purpose and in good faith;
2. does not have material personal interest in the subject matter of the business judgement;
3. is informed about the subject matter of the business judgement to the extent the director reasonably believe to be appropriate under the circumstances; and
4. reasonably believe that the business judgement is in the best interest of the company.

I then speak to Jason about what data and advice are provided to the directors before they make any business decisions, giving a more practical overview for this article.

Q&A with Jason

a) What shift do you see that businesses are making in the post COVID-19 world and how does the business development team work out new business plans to be presented to the company?

Jason: Well, it is obvious that companies and organisations that have invested significantly in digital transformation will be able to adapt and accelerate changes better than other companies who lack the technology backbone and online presence. Having said that, no matter how digitised you are, there is always a need to look beyond the current development as the focus now is on how companies can adapt to the new normal in the post COVID-19 world. For example, in the retail industry, we can see a huge shift of customer behaviour in terms of their purchasing trend and attitude towards digital commerce.

What we have done is to always consider the 5Rs:

1. Resolve: Identify and highlight the immediate challenges arising from the COVID-19 pandemic that affect your institution’s workforce, customers and business partners.
2. Resilience: Address near-term cash-management challenges and broader resiliency issues during virus-related shutdowns and economic knock-on effects.
3. Return: Create a detailed plan to return business to scale quickly when the situation gets better, especially on reviving the supply chain, matching volume to actual demand, and, most importantly, protecting the workforce.
4. Re-imagination: Think carefully and be prepared for the next normal, and how companies can reinvent themselves.
5. Reform: Consider strategies to address some of the persistent issues affecting the sector to avoid the next crisis.

Photo by Caroline Ashley

For instance, people nowadays are more inclined to make payments online. Therefore, businesses should adapt and reform by having a greater variety of online payment methods such as e-Wallets, Google Pay, Paypal etc. I also want to highlight that there is a need to transform traditional supply chain models and companies should start strengthening their supply chain.

b) You talked about the importance of digital transformation just now, and we know that the main concern of every business owner now is how to keep their business afloat during the COVID-19 situation. So, if a director decides to digitalise his/her company now, what are the considerations that he/she should take into account when making a business decision on behalf of the company?

Jason: In my view, companies must consider the following main factors before jumping into the digitalisation bandwagon.

1. Product / Services: “Is the product/services suitable to be digitalised?”

2. Logistics: “Are your company’s budgets tied to digital initiative?”

3. Data Security: “Does your company have sufficient IT infrastructure to tackle data security issues?”

4. Online Marketing: “How much does the online marketing cost, and what is the return of investment (ROI)? / “Does your company have enough expertise to lead digitisation initiatives?”

Some other considerations I would suggest a director to look into when choosing the path of digitalisation, include but not limited to:

• Define the company’s business goals;
• Ways to develop a digital mindset for your company;
• Be prepared for continuous development because digitalisation is a long-term investment; and
• The company’s organisational structure.

Once there are answers for all the factors, directors can then make a sound decision to drive digitalisation for the company.

c) The COVID-19 pandemic has fundamentally changed the world as we know it. Consumers’ attitude, behaviours and purchasing habits have changed and may not return to before. Do you think directors have more duties owed to the company post pandemic?

Jason: Hmm, the responsibility of directors definitely develops critically during this pandemic, where they need to make fast and sound decisions for the company, which carry greater risks due to the daily changes on government’s regulations and restrictions. Directors will need to capture and ride this wave as companies who succeeded in creating connections with the customers during these times will create a lasting relationship well beyond post COVID-19.

d) Can you share how business development teams may assist directors in reaching the right decision for the company?

Jason: We mainly undertake holistic analysis and provide relevant figures, be it quantitative or qualitative, to assist directors in their decision-making process. For example, cost cutting measures might be a viable option under current circumstances, but must also take customer experience as a whole into considerations. I would say our job mainly is to look into what desirable outcome is required by the directors and we will conduct research to provide the hypothesis. Occasionally, directors would come up with the hypothesis and our job is to prove the hypothesis with facts and figures, whereas sometimes directors identify the problems for us and we come up with the relevant hypothesis. So, it really depends on the circumstances.

e) In the event there are disagreements between business development teams and the director, how do you resolve it? For example, if a director insists that his hypothesis is correct even though your team has data that proves otherwise.

Jason: An interesting question haha. We will review all aspects of quantitative and qualitative analysis and present the pros and cons of making that decision. At the end of the day, the decision is still made by the directors and if they trust their own judgement and go against our proposal, there is nothing much we can do actually.

Conclusion

In a nutshell, directors have a duty to oversee business risks especially during the pandemic to guide their companies during this uncertain time. Therefore, directors should synergise their internal team and look into the data and current business environment to make the best decision for the company. It is only when the directors have fulfilled his duty to act with reasonable care, skill and diligence towards the company, he/she may then invoke the Business Judgement Rule in Court to exclude his/her liability from the losses and damages incurred by the company due to their decision.

Disclaimer: All information displayed in this article is strictly intended for general information and knowledge only. Do seek advice from a qualified lawyer if in need of legal assistance.

This article was written by Douglas Goh and Melissa Lim from Melissa Lim & Associates.